How Do I Estimate How Much Tax I Owe?

Trying to figure out how much tax you owe can be a headache. There are so many variables at play and things to track. It can be stressful: Make a mistake with your estimate and you could end up having to pay penalties and fines on top of what you already owe!

If you’re wondering how you can estimate how much tax you owe, you’re not alone. It’s one of the questions our customers ask most often at Hacker Accounting. Here’s some information about tax estimations and how to calculate them.

What are Estimated Taxes?

The IRS and state treasury departments require that individuals and businesses must pay taxes as they earn their income. If taxes aren’t withheld from wages or other payments, you will most likely need to pay estimated tax payments each quarter. Four times a year, you are required to send in enough of your revenue to cover your income tax and your self-employment tax obligations. These include Social Security and Medicare.

If you are self-employed, you may have to pay estimated taxes. In addition, if expectations are to owe $1,000 or more when you file your annual return as an individual, you will have to pay estimated taxes on your income. Also, if your business is structured as a corporation, you may also have to pay estimated taxes if you’re expecting to owe $500 or more when you file.

If you don’t pay enough tax throughout the year by making estimated tax payments or through withholding, you’ll have to pay a penalty for underpayment of estimated tax. There is a bright side: The safe harbor rule. The IRS knows that calculating earnings can be tricky, so there’s a margin for error when you file. The way the safe harbor rule works is that if you pay at least as much as your previous year’s liability or pay within 90% of your actual liability, then there will be no penalty for underpayment.

How Much Should I Pay?

Calculating what you’ll owe for each quarter depends on several different factors. To get an accurate idea on what you’ll owe you’ll need to figure out the following:

Expected adjusted gross income

Taxable income

Deductions

Credits

Keep in mind that every business is different, as is the tax situations you’ll find yourself in year after year. Talk to an accountant to discover the best and most accurate way to calculate your estimated taxes. If you want to try tackling it on your own, there are three methods for calculating estimated taxes:

Use Form 1040-ES: Calculate your quarterly payment by using this form. It includes a worksheet which can help you estimate how much you owe for the current year. Corporations should use Form 1120-W to figure out their tax obligations.

Last Year’s Return: Refer back to last year’s return. See if all the income and deductions you expect to take on your current year’s tax return is in range with the estimated tax payments you made last year. Just be sure that the range is close: You don’t want to end up getting a penalty for underpayment.

Quarterly Calculation: This is a strong option for freelancers or independent contractor. If you’re facing fluctuating or cyclical income, calculating your payments quarter by quarter

When Should I Make Payments?

The year divides into four payment periods for estimated taxes. Payments for each year are due on the 15th of April, June, September and January. You should try to pay the minimum owed by the due date. Late payments could get you penalties from the IRS or your state.

Chris has been working in the bookkeeping and accounting field for over 15 years preparing business, income and payroll taxes. Chris has a bachelor’s degree from Arizona State and is an Enrolled Agent with the Internal Revenue Service.